How to create a simple trend-following strategy for crypto — The “Slow Motion” Strategy.
The highly volatile crypto market
You are interested in the crypto market and more specifically in “altcoins”… Yes? but you may say it’s a risky market! Difficult to play because of its high volatility. The altcoin market (All crypto except Bitcoin and Etherum) grew by over 600% in 2021 before falling by over 60%!!!
But what if we told you that there is a simple method to quietly follow the upward trend while avoiding sweating because of the stress of the fall?
The cooking recipe of the “Slow Motion Momentum” strategy (M1).
M1 “Slow Motion Momentum” is a smart and easy trend-following strategy to benefit from upward trends while protecting capital as it is paused if conditions are not favorable.
Below is an interview of the strategy author explaining the concept.
Can you describe what makes this strategy specific?
The concept is to create a mini-index composed of the 10 higher-cap altcoins. Then, at the start of the month, buy the index and change the index composition if necessary at the end of the month.
The little extra that makes this strategy interesting is that we will not enter the market if a long-term uptrend is not underway. Hence you are sure to be protected in case of a severe bear market. Despite you will stay out of the market for a few weeks and not necessarily re-enter at its bottom, you are guaranteed to follow the upward movement slowly and surely; hence the name Slow Motion Momentum.
The idea of entering/exiting the market came when I read about the dual momentum concept (Check this book: Dual Momentum Investing: An Innovative Strategy by Gary Antonacci). I got from this read that you may not have to stay 100% time invested in the market. But when you do, the signal must be clear enough. It is better to be sure to pocket 20% than to have a 50/50 chance of winning 40%, right?
Creation of a mini altcoin ETF
How do you create the “mini-index”?
At each start of the month, 10 top cryptos are selected, except for stable coins, bitcoin, and Etherum. It can be assumed that the 10 “Altcoins” with the highest market capitalization will perform well since they are part of this “elite”. In addition, mixing 10 crypto-currencies helps to reduce volatility, thus improving predictability.
How assets are allocated?
Either one can allocate assets depending on their market cap or equally weigh them. I prefer equal allocation as it is easier to manage when it comes to assessing results.
When to buy and sell?
Once you got your mini index, what do you do?
There is a “buy” signal I survey. If it’s a green light, strategy is launched and the mini index is bought. Sometimes one does nothing at all.
It can be tempting to stay invested or buy when the market is low. But remember that we are on the Momentum strategy, we are not here to buy the bottom, just to follow the strong upward movements.
What is this signal?
It’s very simple. One takes the crypto market cap without Bitcoin and Ethereum, (as these two giants are over-represented and can skew the results). Therefore one has a good proxy for the Alt-coins dynamics. Then one computes the 5 day average for the RSI. If the 5-day average jump above 60, the signal is validated.
As you can see above, once the buy signal is triggered, the upward momentum is clear enough, so we assume it will last enough to generate substantial returns.
OK, we got the concept, can you explain the rules to follow when to buy and sell?
1# Strategy is reboot each month, with the top 10 Altcoins per market cap. One enter the market if the “buy signal” is green (5day avg RSI above 60)
2#A stop loss is programmed to be triggered if the portfolio value is down by -20% on a 7 day period.
3#After a stop loss, one has to wait 3 days. The strategy is re-launched only if the “buy signal” is green (5day RSI average above 60). If that is not the case, we wait until the next month and go to step #1.
Tools to manage the portfolio
Let’s go more into details, how do you manage “buy” and “sell” actions?
I use portfolio management tools like Shrimpy. With this tool you can create an index, setting the weight of each asset within, and then ask the software to buy all assets at once
It is also possible to set up a Stop Loss. If the total assets of the portfolio fall below a predefined level for a certain period of time, all assets are automatically sold.
What is the horizon/duration for this strategy?
This is a long-term trend-following strategy, which should be used over a large period of time on a continuous basis. The only thing to consider is that the strategy may do nothing for a few weeks. If you are patient enough, that’s fine…
What the performance of this strategy?
Before launching the strategy for real, I did a performance study with a backtest on a large time scale. This was done in order to study the behavior of the strategy through multiple market configurations (bull, bear, range..). Below you can see a graph with.
– Red line: buy and hold NAV*
– Blue line: strategy NAV*
*NAV: Net asset value
As you can see, the M1 strategy outperforms the market over a long period of time (the scale is logarithmic). From 2017 to 2021, the strategy survived bear markets and outperformed a buy and hold strategy in the long run.
What to conclude about backtest’s results?
Even if the past does not predict the future, we can observe that the performance is better, that the drawdown is lower. All this while making only 26 trades over 1339 days (about 0.6 per month). The counterparty is that it is necessary to do nothing 51% of the time and not to succumb to boredom!
It looks very good, have you implemented another mechanism to improve results?
Yes, I did. To boost returns, there are a couple of extra features I’ve added
> A “buy the dip” mechanism
> A “take profit” mechanism
> A “Dollar Cost” Average mechanismThese features are designed to maximize the IRR, i.e. to improve the cash flow. It will also improve the max drawdown. The details will be explained in another article, but if you are interested in, you can still send me an emai.
Sure! I guess many will do to get some help!
A final word on the key strengths of the strategy?
This is a very simple but effective way to play the market growth in the long run. As long as the crypto market is growing, this strategy will play a key role in my portfolio.
Strategy Authors(s)
With a Master’s degree in Engineering and an MBA at the London Business School, Augustin has accumulated more than 10 years of experience working on innovation projects. He has been involved in blockchain projects throughout his career until he finally made it his main focus. He now combines his experience in strategy and his passion for cryptos to share his best ideas.
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